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February 18, 2014

Is the Long Bull Market Finally Over?

One of the most pervasive questions of our day may be how much longer this bull market will last. Clearly, this is an issue of significant importance and as such, it's drawn great attention in the financial press. Some experts believe we are on the verge of a correction or perhaps another crash. Others say there's room to run. Is the market about to sour?

Before we proceed, let's bring some context to the discussion. This bull market has lasted over 1,805 days or just under five years. That's not unheard of as bulls go. In fact, many have lasted longer, including: 1942-46; 1932-37; 2002-07; 1982-87; 1949-56; 1921-29; and 1990-2000. In addition, several bull markets have risen more, including: 1942-46; 1903-06; 1896-99; 1949-56; 1982-87; 1932-37; 1990-2000 and 1921-29. Therefore, this bull market is not that abnormal longevity-wise. However, when you consider its behavior in the midst of a weak economy, and with the Fed’s policy, well, that's another matter (and of course, this presumes there's a relationship between stock market performance and economic growth).

Stocks rise when investors invest in them and investors invest in them when they believe they will receive an acceptable return. Pretty basic stuff, I know. Considering that stocks rise when investors find value, even if the value isn't real, but only perceived, it makes sense that the economy would play a role in stock performance. Unfortunately, it's not quite that simple, nor are the two as related as one might think. For instance, using quarterly periods for the percentage change in the DJIA and GDP, from 1947 to 2014 we find the correlation between the two is around 0.25. I believe stocks can potentially perform better when the economy is strong as this tends to boost profits. But so does an improvement in productivity and stock buy-back programs. In the past, stocks have had strong performance during a weak economy, but how long can it persist?

Perception can be as powerful as reality. One example was during the late 1990s. Technology stocks rose dramatically, even on companies with zero earnings. Why? Because investors perceived that these tech darlings would continue higher. Investors got caught up in tech-mania, the madness of the crowd, or whatever moniker you prefer. Even famed hedge-fund manager and CNBC regular Jim Cramer got caught up in the hysteria. In fact, here's a direct quote from a speech he delivered on Feb. 29, 2000, in which he was speaking specifically about tech stocks.

"We try to own every one of them. Every single one. And if I had my druthers, I wouldn't own any other stocks in the year 2000. Because these are the only ones worth owning right now in this extremely difficult, extremely narrow stock market. They are the only ones that are going higher consistently in good days and bad."

This should reinforce the fact that no one can predict the market with consistency and accuracy. No one. Even so, we are barraged with confident individuals who assert that the market will end the year at this level or that. However, even the most sophisticated mathematician cannot predict what is essentially unpredictable, that is, human behavior. Perhaps if we find a way to do this, it will undoubtedly be the most significant financial coup the world has ever known. It'll be like the TV commercial with the man and the magic sea shell that told him how to invest. Actually, this is a somewhat frightening thought.

In conclusion, thanks to the Fed and its policy of low interest rates and a plentiful money supply, stocks continue higher, and since you can't fight the Fed, it's best to make sure you have your stops or puts in place. Good luck out there!